Mercadolibre Inc (MELI), Amazon.com, Inc. (AMZN): Getting It Wrong, This Stock Is a Winner

Smart Investing is a constant education. There is a need to be able to step back and look at the Big Picture to gauge the winds of the market. To look at yourself and the goals you set with consistency in good performance are the most important. Then there are the stocks you put your hard earned money into: knowing when it’s the time to buy, and when it’s the time to say goodbye.

However, some days you just get it wrong.

Mercadolibre Inc (NASDAQ:MELI) was one of these stocks. The provider of e-commerce platforms in Latin America first featured in May 2012, just prior to its then earnings. At that time, the stock was trading at $92.86, having eased back from a $100 high. The company just missed estimates, but was hurt more by (then) reports of Amazon.com, Inc. (NASDAQ:AMZN) releasing a dedicated site in Brazil. Not surprisingly, the naysayers moved in — along with the usual belated analyst downgrade — which sent the stock stumbling down over 30% from its 2012 high.

In November, despite fulfilling earnings expectations and delivering 25% growth in year-on-year registrations, I grew skeptical on the lack of reaction to the news. I was concerned a possible ‘hidden’ story (an issue of increased fraud was raised by an analyst in Q3 2012 earnings call) was keeping the stock back. However, this story, ultimately didn’t emerge.

Ultimately, Amazon.com, Inc. (NASDAQ:AMZN) did launch in Brazil in December 2012, bringing with it a Brazilian Kindle store.
But Amazon’s launch didn’t trigger a price rout for Mercadolibre Inc (NASDAQ:MELI). In fact, for Amazon’s most recent earnings conference call, the company said nothing about its Brazilian operations. The only comment made was in response to an analyst’s question on its Brazilian performance, stating “we are in the right geographies right now.” The launch of Amazon.com, Inc. (NASDAQ:AMZN)’s Brazilian operations seemed to take the uncertainty out of Mercadolibre Inc (NASDAQ:MELI); since Amazon’s launch, MercadoLibre has gone from $70 to around $120 over the course of six months.

Amazon’s challenge is typical of one faced by its competitors: it was the small fish coming into the pond owned by the big fish, MercadoLibre. Amazon.com, Inc. (NASDAQ:AMZN) runs a distant second to Mercadolibre Inc (NASDAQ:MELI) in Brazil. yStats.com released a report in December 2012 which stated that MercadoLibre was the “leading B2C E-Commerce Player in Brazil“, and Brazil generated the highest B2C e-commerce revenue in all of Latin America, with one third of all Internet users in Brazil having bought something online.

Mercadolibre Inc (NASDAQ:MELI)’s more recent earnings continued the good growth story: for Q1, there was an additional 23% growth in registered users (4.2 million new users). Payment transactions grew 38% with $1.6 billion of merchandise traded on the site. Total payment volume grew 62% (in local currency). With 3% of commerce in Latin America conducted online, the growth prospects for MercadoLibre remain very favorable.

Mercadolibre Inc (NASDAQ:MELI) runs a rich P/E in the fifties, with a projected P/E in the thirties. However, this is half of Amazon’s projected P/E which is in the eighties, and is currently trading at an earnings loss. eBay Inc (NASDAQ:EBAY) is another also-ran in Brazil, given it remains focused on the “opportunity for enormous growth” in the market, rather than delivering on it. Given the criticism of Brazilian custom processing times by non-Brazilian eBay members selling to Brazilians, it’s likely that Brazilians have restricted themselves to buying and selling within the Brazilian market to avoid such delays.

But even here, MercadoLibre has an advantage by its association as eBay Inc (NASDAQ:EBAY)’s Latin American partner, allowing it the opportunity to provide the market the parent eBay can’t, for reasons outside of its control. eBay’s subsidiary, PayPal, is enjoying success in Brazil but fell short of initial expectations. The PayPal platform is restricted because of infrastructure needs: there are significant challenges in Brazil, where it’s harder — and more expensive — to offer stable and secure internet access across the country. In this regard, mobile commerce is seen as a more viable option for Brazil going forward.

Mercadolibre Inc (NASDAQ:MELI) holds all the cards in Brazil, and likely has the advantage in Argentina and Mexico. It’s larger U.S. rivals have struggled to gain a foothold: eBay Inc (NASDAQ:EBAY) will probably look to the Amazon experience to decide whether more resources should be given to this market. As for Amazon.com, Inc. (NASDAQ:AMZN), it will probably be next year before the company will be in a position to offer numbers on its Brazilian operations. The weakness of its rivals has given MercadoLibre a bit of a price premium. Until Amazon and eBay unlock their potential in the region, MercadoLibre remains the Latin American e-commerce play.

The article Getting It Wrong: This Stock Is a Winner originally appeared on Fool.com and is written by Declan Fallon.

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